WHILE Bank Negara Malaysia (BNM) will continue to keep the existing overnight policy rate (OPR) unchanged at 1.75% until the economic recovery is firmly entrenched, rising inflationary pressure may prompt the central bank to re-evaluate its monetary policy.
“An expected rise in core inflation suggests an end to a low interest rate environment, a condition that could trigger an interest rate lift off in 2H 2022,” suggested PublicInvest Research economist Dr Rosnani Rasul in her review of BNM’s Economic & Monetary Review 2021.
“Impending hikes will also be driven by a full employment condition in 2022 and a pre-emptive move to avert financial imbalances.”
BNM came out with its latest key macro-economic assessment and forecast in their recent Economic and Monetary Review 2021 yesterday (March 30). The report was released alongside its Annual Report 2021 and the Financial Stability Review for 2H 2021.
At this juncture, the central bank reckoned that the risks to inflation were assessed to remain manageable despite some upward cost pressures from higher global commodity prices and supply-side disruptions.
Core inflation is expected to average higher between 2.0% and 3.0% year-on-year (yoy) in 2022 (2021: 0.7% yoy) due to stronger demand conditions amid lingering cost pressures.
To re-cap, BNM has cut the OPR by 125 basis points since the start of the COVID-19 pandemic – a sharp and drastic measure that pushed the OPR to historic lows.
“(For now), headwinds from the global COVID-19 pandemic and nascent economic recovery post-crisis may, however, push the central bank to retain its accommodative policy in 1H 2022,” projected PublicInvest Research. “This will also be driven by the uncertainty from the Russia-Ukraine conflict.”
TA Securities Research also maintained its view that BNM’s lift-off would only occur in 2H 2022 with the quantum of rate increases being gradual. The research house expects BNM to retain OPR at 1.75% during its third Monetary Policy Committee (MPC) slated for May 11.
“BNM is mindful to avoid any premature withdrawal of its policy support given the lingering downside risks to its growth outlook and will closely monitor the emergence of a more entrenched and sustainable economic recovery while remaining vigilant against financial imbalances,” TA Securities Research economists Shazma Juliana Abu Bakar and Farid Burhanuddin pointed out.
“We believe any potential adjustments to the degree of monetary accommodativeness would be made in a measured and gradual manner.”
Meanwhile, Kenanga Research expects OPR to remain unchanged at 1.75% at least until 3Q 2022 to ensure Malaysia’s smooth transition to endemicity.
“Malaysia’s decision to open up the economy for international visitors is seen to boost the economy, especially in the services sector. This is expected to be one of the main drivers of the country’s economic recovery in the next three to six months,” projected head of economic research Wan Suhaimie Wan Mohd Saidie.
“While there is a low chance of the BNM raising the OPR sooner than the 3Q 2022, it is still a possibility, especially if inflation turns out to be much hotter-than-expected due to demand-driven domestic as well external factors.” – March 31, 2022
